The issue in Brogden v Investec Bank plc was the allocation of bonuses under the employment contracts of two traders. The contracts provided for a bonus calculation based on a formula which took into account the profits generated by the particular desk at which they worked.
The employer calculated the bonus using an automated process and, for the year 2010/2011, this recorded a loss, so that no bonus was payable. The traders disputed this, one of their main arguments being that the profits generated for the bank generally should be taken into account.
In the High Court, the claim was dismissed on the basis that the entitlement to a bonus was subject to the employer's discretion which it had not exercised irrationally.
In the Court of Appeal, however, although the conclusion was the same – that the employer was not in breach of contract – it was for different reasons. The Court of Appeal decided that this was not a case involving contractual discretion; the method of calculation of the bonus was an established method within the bank and the traders knew this when they had entered into their contracts. The bonus clause did not give the employer any discretion and so there was no need to look at the issue of whether it had correctly exercised that discretion.
The Court of Appeal also rejected an argument that, by making payments to increase the bonus pool in previous years, the employer had engendered a reasonable expectation that this approach would continue. The fact that it had agreed to make available a larger sum of money than that arrived at under the contractual formula was not capable of giving rise to any expectation that it would act in the same way in succeeding years and did not create any obligation on the employer to do so. The payments were simply ex gratia increases in the size of the bonus pool.